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Douglas Trudeau , Assoc. Broker
Prudential Foothills Real Estate
64 N. Harrison Road, Suite 160
Tucson , AZ 85748
Mobile: 520-954-2209
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Real Estate Market Road To Recovery

Recovering The Real Estate Market will take a joint effort from home buyers, lenders, Realtors and homeowners. Lets start with homeowners who don’t want to sell their homes, but have to because of increasing interest rates from ARM’s, and Lenders who hold the note. I have seen too many homeowners who got caught up in an ARM whose income today is not what they expected two or three years ago. So lets look just at ARM’s to get the ball rolling.

Seeing the PI for a $200,000 loan at 5.75% was enticing to see a payment of $1,168. For simplification and the sake of argument, lets say insurance is $50 monthly and taxes for the land alone are $12 a month, now the payment is $1,230 for PITI. In Tucson real estate taxes for new construction homes do not catch up with that of resale homes for a year or two. Suddenly a year or two down the road the homeowner may be looking at another $166 a month for taxes. Now they are looking at payments of $1,384. Here comes the rate adjustment. Suddenly the homeowners (formerly buyers) are looking at 6.75% instead of 5.75%. That PI base just jumped from $1,168 to $1,297. That $1,230 PITI payment they signed for at closing just took an unmanageable jump to $1,508 in just two years. Ouch. Most buyers look at the PI payment of $1,168 without seeing the other $340 a month coming. They definitely ignore what is coming down the road.

I like to tell buyers to plan on the $1,508 and pay the additional $340 a month toward the principal so that when the bill comes in two years they’ve paid $8,000 toward the principal. Whether they hear me or not, I at least try. Now that I have explained the progress toward trouble, lets look at a possible fix.

For an additional $4,080 a year lenders are will to gamble and lose $28,000 or more on a foreclosure or short sale. Hmmm. Doesn’t make a whole lot of sense. Lending institutions should reevaluate the ARM increases for homeowners. Especially when that $200,000 home may be valued at $180,000 or less in today’s market. They still hold a note for $200,000. Rather than letting the home end up in a short sale or foreclosure, the lender could maintain the original interest rate for a shorter period of time with a scheduled annual increase no more than .01%. Let’s see on a $200,000 loan that would be an monthly increase of $12.73. Not a huge amount, however, when done 10,000 times $127,300 of increased monthly cash flow seems a lot better than a potential loss of $28,000,000. Will lenders lose some money, most likely. However, a lot less than through short sales and foreclosures.

Now, how do they keep homeowners from selling or refinancing. First, keep the rates at a steady predictable controlled level. No higher, no lower. Maintain status quo for a period of time. That will remove some fear of rates increasing. Second, look at prepayment penalties. A flat annual penalty for a seven year ARM of $7,000 the first year, $6,000 the second, down to $1,000 for the final year. Add an option to homeowners that the prepayment penalty will be deferred to their next home loan should they use them as the lender for their new home as long as payments have been paid on time. Possibly making the next loan a fixed rate. Provisions could be made for those who can substantiate that a geographical relocation of 50 miles or more has created a need to sell their existing home and purchase another. Again with the stipulation of using the same lender.

The results of which could be a reduction in inventory for homes on the market from sellers who prefer to keep their home and save their credit. Not everyone would qualify, however, if a significant number of homeowners with ARM’s used the option it would be a step in the right direction.Foreclosures could be reduced as well as short sales. The secondary market may see the benefits and begin to open up purses to get the flow of primary and secondary home loan money flowing again. A win-win situation for homeowners, primary lenders, and second market lenders.

Realtors should stand their ground and refuse to list homes that are over priced. Get the over priced homes off the market. They aren’t going to sell anyway, so why add to the problem. You don’t go to a mechanic for chest pains. If the owners know better than the Realtor and insist on over pricing, let them sell it as a FSBO. Either they’ll give up and take it off the market or call a Realtor to sell it for a reasonable price.

With available housing inventory reduced, buyers will have less to choose from to confuse them. The media could report a positive recovery for the market, the economy would be stimulated, and we could all get back to normal. Buyers who are sitting on the fence post waiting for the bottom will soon see the bottom has passed them bye-bye. Buyers would find themselves in a woulda-shoulda-coulda mode and be stimulated to take action to start buying those homes on the market. How long would it take. Who knows. But, at least its not a matter of sitting back, finger pointing, I told you so, and Monday morning quarterbacking. At least it would be a positive step in the right direction. Call me a dreaming optimist. The old saying of dreams becoming visions and visions becoming reality could stem from forward positive thinking here. Who knows? Remember that next time you get in your car or fly in an airplane. Those were once dreams that pessimists said would never happen. I wounder if pessimists drive or fly?

This entry was posted on Friday, October 19th, 2007 at 7:38 am and is filed under Tucson Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Doug -

The first part of your post is brilliant. Seriously.

I think it goes into the macro economy a little deeper. I don’t think its all about housing. If it were… housing would be a simple fix.

October 19th, 2007 // bobby joe
Bobby Joe - Thanks for the comment.

We all know that the national and global economy is deeper than real estate. That’s a discussion for economists. However, real estate is an intricate part of the economy. I’m concerned with the real estate end of the formula.

October 20th, 2007 // Doug
Very good post Doug.

Letting homes go into foreclosure if there is any chance to save them is just nuts on the part of the lender.

Also, the lenders haven’t seen the light on short-sales. Short sales are almost impossible to negotiate with a lot of lenders. It costs them more in the long run.

October 21st, 2007 // Marty Van Diest
Marty - Thank you. Let’s hope that big lenders get wind and make significant changes. It’s not a cure all, but, a good start in the right direction. Imagine if this type of thinking were to spread as fast as bad news? Imagine if every real estate and mortgage blogger made similar suggestions?

October 21st, 2007 // Doug

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